Why discounting needs to die for luxury cars

There is a constant argument that rages on in the CarAdvice office. It usually goes like this: “Why would anyone pay $70,000 for a small luxury SUV”, to which my usual reply is, “They don’t, these cars are generally well discounted”.

And so begins a debate about why luxury car companies price their cars so high to start with, then have them ripped apart by tens of thousands as customers start that slow dance of a walk out.

At CarAdvice, we can only go by the manufacturer recommended list price (MRLP) when we review a car, because it would be nearly impossible for us to write about any discounts on any particular model taking place at the time. Furthermore, there is always the on-road component of the price as well (more on that here).

The problem with this approach is that in reality, you can sometimes get an amazing deal on a luxury brand – well and truly below list price – that puts it in contention with the mainstream brands. However, due to the advertised MRLP, most would simply ignore the higher-end offerings altogether. This is a bad outcome for all involved.

You can call it basic sales techniques and all part of the game, but, folks, it’s 2018. Car companies are spending literally billions of dollars in research and development, plus marketing and brand building, only to have some ‘I have been here for two minutes’ dealer ruin the whole experience by selling the same car to two different buyers at significantly different prices.

How do you think the guy who paid $10K more for the same car, a month earlier, is going to feel come resale time?

Having spent a great deal of time helping friends or family buy new cars this year, I have come to the realisation that luxury car companies need to drop the facade. What’s the point of advertising a car for $60K, when realistically you can get it for $50K or less? Sure, you might make some more margin on one buyer over the next, but as cars increasingly become more a form of commodity with brand loyalty in the toilet, there needs to be a rethink.

I recently bought my parents an Audi Q2 and have helped nearly a dozen others buy luxury cars this year. In that period of research for my folks, we drove everything from the Mercedes-Benz GLA/GLC to the BMW X2, Lexus NX and even the Hyundai Kona/Tucson. Only Lexus refused to give a meaningful discount, and the first Mercedes dealer we visited couldn’t even be bothered to give a price at all, or return a phone call. The rest? Discounts ranged from 10 up to almost 30 per cent.

The reason for these discounts is simple and yet complicated. As with most retail businesses, there are targets to meet, and when one is behind, discounts are more forthcoming. It’s a tough market at the moment, especially at the premium end. Dealers are making less and less, while tightening rules on finance offers have ripped out whatever side income they had left. A good dealer returns around 1.5 per cent per annum. You’d be better off leaving your money in the bank than starting a dealership these days.

Secondly, when manufacturers are giving overall bonus incentives to dealers to meet such monthly targets, and leaving it to them to lose margins or – sell at or below cost – just to move stock to meet said targets, it starts to become standard practice (this is also why you should avoid buying a car at the beginning of the month).

But even so, the question has to be asked: if you’re willing to give a 20+ per cent discount on a car, just for the sake of meeting unsustainable targets, what is the long-term future of the brand? Are dealers and dealerships – or let’s take it a step further – are car company CEOs ever incentivised on long-term sustainable growth? They all talk about it, but seldom is that the case.

Of course, most brands do ‘sales’, even Mazda has the ‘M’ day. Looking outside of car companies, it’s a little different when your fridge goes down by $300 than when your car is discounted by $15,000. In a time when ‘brand loyalty’ and the ‘customer experience’ are all the buzzwords that marketing types can’t seem to shut up about, luxury brands cannot afford to annoy their customers. And there is nothing more annoying for a customer than realising – years down the track – that they paid more than someone else for the exact same product.

You need to look at how brands like Louis Vuitton treat their product, and you’ll understand how one goes about building a luxury brand that is more about the brand itself than the product. Car companies love to say the same, ‘you’re buying into the lifestyle’, but your entry point can differ depending on supply and demand that quarter.

In the case of LV, there is hardly ever a discount, no sales, and very infrequently something else that cheapens the brand or the product. Undoubtedly, LV has sales targets to hit too, but it never seems to come at the cost of long-term brand viability. Sure, the margins in an LV product are much, much higher and competition a lot less stiff, but the principle should still be the same. Protect the brand at all costs.

To give an example, say person A bought a luxury car for close to retail in the first few months following its launch – when discounts on a new model are rare. After some time has passed and the initial rush slowed, sales weren’t going to plan and discounts started becoming the norm, and person B bought the same car for 10 per cent less.

Eighteen months down the track, the same model is now on proper discount for close to 20 per cent. All of these cars will come up for resale in due time, and if you were the guy who got in early – usually the buyers that are all but brand ambassadors – you’ve paid the most and will as such get burnt the most come resale. That’s not a good feeling.

This practice of ad hoc and at times rampant discounting is not just limited to the luxury brands. Go further up the ladder to the likes of McLaren, Aston Martin and Lamborghini and you will find a similar story. Except in those cases, a 15 per cent discount is an even larger sum of money, and you don’t want to be the guy who paid full whack.

Go take a look at the price of a McLaren 650S on the second-hand market and take into account how long some of those have been on sale. Here you have a car that is quintessentially one of the best supercars of the last few years, which can now be had for under $300K. Some buyers paid close to retail for theirs, some got seven-figure discounts. Do you think the guy who lost $200K+ on their supercar in 24 months is going to buy another from the same brand? Maybe that explains why Ferrari sales seem to keep growing.

So what’s the solution? Some brands offer guaranteed buy-back schemes, and that seems to be a good way of dealing with this issue to an extent, but it doesn’t change the fact that some still pay less than others for an identical product. No matter how you look at it, it’s an extremely complex problem to solve.

If you don’t discount and your competitor does, you’re losing sales. But then again, is Lexus better off highly optioning its cars and pricing them properly without discount, whereby you get what you pay for and so does everyone else? Or does it make sense to inflate the price and then reduce it to give the buyer ‘a win’? Are Lexus dealers happier than those peddling the Germans?

In an ideal world, you can say not to discount at all and everyone pays the same price. That is how Apple and Tesla (to an extent) do business. It works if you have done what Apple and LV have and built up a brand that is desirable beyond repute. It’s a bit harder to do that when you’re just ‘another luxury brand’ in a crowded market. Would Infiniti survive without major discounting? Well, will Infiniti survive in general is probably an equally valid question!

Perhaps the other option is that instead of advertising these clearly inflated MRLPs, come up with a figure that is closer to its actual transaction price, so any discounts do not go below five per cent (such as Lexus, for the most part). The issue here is that some manufacturers rely on those that don’t haggle to pay full or close to full whack. Those unfortunate souls tend to get burnt the most and offset the hagglers.

So, while a solution isn’t exactly forthcoming, given the competition is so rampant with a race to the bottom, whereby all that talk of customer experience and brand equity is thrown out the window the second sales targets are down, as a buyer it’s best to be aware. Those sticker prices you see on the windows are more often than not a poor reflection of the purchase price.

Of course, that is not always the case: you are not going to get a big discount on a super-popular model that has a six-month waiting list. Nor are you going to get much off if you want to order a custom-built car to your exact spec. Floor stocks are your best bet.

What I have seen of late is that those who buy on finance are more likely to fall into the trap of paying a tad more than they ought to. That’s because the repayments over the coming years don’t change substantially if the price is $5K different here or there – so it doesn’t seem as big a deal. But is that reason enough not to spend that extra 20 minutes to get the better price? I wouldn’t think so. Remember, you still have to pay out the car at the end of it.

I am well aware that we have plenty of dealers that read CarAdvice, and who would know more about this issue than me, so I am keen to hear your thoughts and ideas on what the solution is. If there is one.